Lending and receiving loans can be essential to many businesses; but it must be done correctly to avoid severe allegations and consequences.
A loan agreement should be written up between the parties and detail everything from the dates, amount, interest rate, and the repayment arrangement. Both parties should sign and date this agreement and keep copies of it for future reference. The danger of not documenting the loan is that the CRA will see the money deposited into your bank account and deem it as income. And unless you have proof that it is a loan, you will be charged with undisclosed income and face penalties and interest and potentially criminal charges for tax evasion.
Another important lesson to be aware of is HOW you repay the loan. A recent example I encountered was a man who received a loan from a customer and then ‘repaid’ the loan with merchandise. Without a loan agreement in place, this transaction looked like any other sale transaction and not at all like a loan that was repaid with goods instead of cash.
The impact of the Canada Revenue Agency discovering these business practices can be detrimental on a business. If the loan is for over $10,000 the government will already be aware of the deposit into your bank account as the banks notify the CRA when deposits exceeding $10,000 are made.
Then when you cannot support that this money is a loan, the penalty for gross negligence is 50% of the understatement of tax! There is also the potential to spend up to five years in jail.
Be preventative and get your agreements done in writing and signed to make sure nothing like this can happens to you.
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